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Wee bit more on Krugman
I agree with Krugman's (new?) stance that we should not be deficit-obsessed, at least "not now." As Brad DeLong points out, under Krugman's scenario the Bush tax cuts would/will expire, and there will be new revenue. Krugman wants to spend it, Matt Yglesias does too. That would be my position, were I a moderate Democrat. I don't favor those spending plans for other reasons, but the deficit per se would not scare me off. In that sense, it is easy to defend Krugman's Op-Ed.
What puzzles me is what happened to the forthcoming fiscal destruction of the United States, given the current (and presumably future) level of the deficit. If Krugman has simply changed his mind, that is fine; after all neither the United States nor the dollar has collapsed. We've been getting new evidence every day and it suggests a relative degree of optimism. If Krugman has changed his mind, I would like to know why. Is it because of this evidence, or for some other reason? I don't require a "Krugman moping in abject defeat and the rest of us cackling I told you so" moment (or do I?), but I genuinely would like to know what is up.
Posted by Tyler Cowen on December 24, 2006 at 06:36 AM in Economics | Permalink
Comments
I think part of it might be specific to the spending he expects to be enacted. Contrary to popular belief, Democrats don't like spending money just for the heck of it. Individual congressmen all have their own pet projects, of course, but the only truly big spending program any Democrats are talking about is some kind of health care reform. And Krugman in particular has been pushing for universal health care.
Now, as we all learned during the social security debates of 2005, Social Security is actually pretty well financed and over the long term will only increase by about 2% of GDP. The real killers aren't abstract entitlements, but Medicare and Medicaid. That is to say, health care.
I can't prove it, but I would guess that Krugman's line of thought is that the spending project he's preemptively defending is a health care reform which, one way or another, absorbs Medicare and Medicaid. The overall increase in government spending is largely a substitution away from current private health spending, so that's not too worrisome. And even if the government isn't able to fully finance it now, once we fix that (ie, get more tax money, hopefully more than covered by the private savings) we've also solved the long-term entitlement problem.
Tyler, have you tried emailing him?
Posted by: Alex F at Dec 24, 2006 7:46:08 AM
Revenue has basically caught up with the stream projected prior to the tax cuts. Why not extend the tax cuts?
Oh - I forgot. Democrats resent me getting money that rightfully belongs to them.
Posted by: Rich Berger at Dec 24, 2006 10:14:24 AM
Krugman has changed his mind on the danger of deficits because he sees the shift in political power
and it is convenient for his party to have academic support for their spending desires. It is wrong to model
Krugman's beliefs as a reflection of an honest intellectual looking for the truth. Better to recognize
Krugman as the political operator that he is. It's not the truth that matters, but what advances
his adgenda.
Posted by: Miller at Dec 24, 2006 3:09:55 PM
Being deficit obsessed is historically the concern of the party out of power. This is the case becasue "your stupid spending" will ruin the country with a deficit while "my crucially important spending" unfortunately may require deficit spending. When a party is out of power, frustrating the 'stupid' spending of the other party often includes appeals to fiscal responsibility. Once in power, a party's own 'important' spending automatically takes priority over budgetary concerns. The only time either party is likely to accept real constraints is during a narrow window when the ruling party is slipping from power and the budget-focused party has not yet gained it.
Posted by: Sebastian Holsclaw at Dec 24, 2006 3:48:10 PM
Tyler,
I don't think Krugman's positions on deficits has changed. He still thinks that we would be better off without them. However, his position is that they are going to exist, regardless. If Democrats restrain spending and get rid of the deficit, Republicans will cut taxes, bring it back. So, the deficit and its costs are just something you have to live with.
Better to accept that political reality and advance your other priorities, rather than sacrifice those priorities to deficit reduction, only to have the benefits of deficit reduction eliminated by the other party through tax cuts.
If you don't accept reality, you get the worst of all possible worlds. You sacrifice spending, but then don't get deficit reduction in exchange. Instead, all you do is advance Republican priorities.
If Republicans had been more fiscally responsible, this would have enabled Democrats to continue a balanced budget now that they have power. But Democrats are not going to balance the budget at the expense of spending, only to have Republicans go on a massive spending spree on tax cuts that primarily benefit the wealthy and run the deficit back up again as soon as they get the chance.
If someone spends their credit irresponsibly, you cut back on their limit, you don't give them more. Here, the Republicans have run up deficits to finance tax cuts for the wealthy. To balance the budget in a situation where power must be shared with Republicans is like expanding Republican's line of credit. The first thing they will do as soon as they get the chance is run up a new deficit to pay for new tax cuts for their friends.
Posted by: Ragerz at Dec 24, 2006 4:01:18 PM
Alex F says "Social Security is actually pretty well financed and over the long term will only increase by about 2% of GDP."
The figure I've heard is 3%, but whichever figure is correct, your statement illustrates the gulf seperating social democrats from small-government libertarians. The idea of a federal government that already swallows 20% of GDP taking another 2%-3% bite (i.e. a 10%-15% expansion of government) doesn't sound to me like a small adjustment -- it sounds like a nightmare.
Posted by: David Wright at Dec 24, 2006 5:13:24 PM
He has been given hope, just as Brad Delong has been given. Nothing has changed except the Dems taking control in the mid-terms, and suddenly the murky night has a dawn on the horizon.
This was my tack against Delong’s baseless posts a day or so back. He’s arguing paygo, which is good in and of itself, but why are he and so many others convinced the Pelosi & Co. are going to effectively implement such a plan?
Paygo is great if they are going to reduce mandatory spending “here,” so that they can pay for something else “there,” and basically behave responsibly.
But that’s not what they are going to do.
Krugman has pimped himself out so that he’s no longer an economist with an advisory eye on politics.
Posted by: Ray G at Dec 24, 2006 9:09:48 PM
If Krugman has changed his mind, I would like to know why. Is it because of this evidence, or for some other reason?
Umm, Krugman is a partisan hack? It really isn't that complicated. Just watch, now that Democrats control both Houses of the Congress, the media's coverage of the economy will change quite a bit.
Posted by: Steven Andrew Miller at Dec 24, 2006 9:40:00 PM
Yes, it would be nice if Krugman would say that he overrated the risk factor of high deficits in the past, but his dire concerns didn't materialize, and he thinks that being fiscally responsible is not a dominant strategy for Democrats in the political game. But we ain't gonna see that kind of intellectual honesty from Krugman. That would raise a lot of questions that Krugman likely can't face about himself. Why did he buy into such dire warnings when the Republicans were in power, but drops them now? There might be a great reason, but Krugman doesn't strike me as psychologically capable of assessing the degree to which his political bias has driven his ostensible economic analysis.
And those of us who haven't turned ourselves into hacks can also choose not to buy into the Saint Clinton routine. Clinton was responsible on the budget deficit, but he was completely irresponsible on entitlements, opposing even reasonable changes in Medicare (including a change that he himself had suggested just months before). As we know, Medicare is the biggest looming fiscal issue. So yeah, nobody's getting out clean. As economists, we can just advocate the best policy we can, which is addressing the three deficits we face in the general budget, Social Security, and Medicare.
Posted by: Keith at Dec 24, 2006 9:52:32 PM
Because the collapse risk is going to exist no matter what, so we may as well put into place our preferred ideas anyway? There's no point to paying politically to fail to reduce risk.
Posted by: Kimmitt at Dec 25, 2006 12:25:26 AM
Consider it the opposite of the "starve the beast" strategy of Republicans. As the deficit doesn't seem to matter on an annual or even business cycle timescale, why not use it as a pretext to minimize spending (Republicans), or maximize spending (Republicans), as the case may be.
Posted by: eric at Dec 25, 2006 5:55:18 PM
Posted by: Sebastian Holsclaw :
"Being deficit obsessed is historically the concern of the party out of power. This is the case becasue "your stupid spending" will ruin the country with a deficit while "my crucially important spending" unfortunately may require deficit spending. When a party is out of power, frustrating the 'stupid' spending of the other party often includes appeals to fiscal responsibility. Once in power, a party's own 'important' spending automatically takes priority over budgetary concerns. The only time either party is likely to accept real constraints is during a narrow window when the ruling party is slipping from power and the budget-focused party has not yet gained it."
Sebastian, that's a very nice political science theory. Of course, it was torn to itty bitty shreds by the history of the USA, for the past quarter-century. I guess reality does indeed have a liberal bias.
Posted by: Barry at Dec 26, 2006 8:41:49 AM
Actually Barry, history is his proof.
Posted by: Tom at Dec 26, 2006 9:46:02 AM
Ragerz has it exactly right: Krugman doesn't favor large deficits under current economic conditions; rather, he sees no point in having Democrats cut back their programs to reduce the deficit because he knows the Republications would just restore the deficit through tax cuts for the rich. Yet Ragerz's comments are ignored in this thread.
Posted by: Al at Dec 26, 2006 3:35:51 PM
Barry, Democrats responded to the threat of Perot voters breaking Republican by trying to 'pay for' the hugely expensive central health care proposal by being fiscally responsible in other areas. As a package it would have been revenue negative, but since the health care proposal failed, it ended up not being negative.
Posted by: Sebastian Holsclaw at Dec 26, 2006 3:44:45 PM
There is a lot of over-reading of Krugman here.
He is maintaining his call for balanced budgets and maintaining his opposition to deficit spending. His only issue is what to do with the "extra" revenue that comes in if the tax-cuts aren't extended (and the war ends or whatever).
Krugman never argued that a large (but not increasing) deficit will be the end of America. He was complaining about the runaway deficits that would come with increasing spending combined with lower taxes.
Krugman is essentially saying "This is YOUR debt. We won't make it any worse, but you're going to have to pay it off yourself the next time you're in charge."
Posted by: Rich B. at Dec 26, 2006 4:05:24 PM
Maybe he realizes that Bush will use the veto pen, and partisan fighting in Washington will keep them from happily spending our money. Basically, a repeat of 1995, with the parties switched.
Posted by: Brad Hutchings at Dec 27, 2006 5:44:14 AM
Ragerz said"But Democrats are not going to balance the budget at the expense of spending, only to have Republicans go on a massive spending spree on tax cuts that primarily benefit the wealthy and run the deficit back up again as soon as they get the chance."
Whew--I thought this kind of thinking had died with the Soviet Union: "a tax cut is a spending spree" presumably because all income belongs to the State. Apparently, however, it is alive and well within at least some elements of the U.S. Democratic Party. Please tell me it ain't so.
Posted by: David W. Drake at Dec 27, 2006 3:31:55 PM
One argument for tax cuts is, as pointed out above, "starve the beast." Unfortunately, the Republicans did not put the beast on a diet when they had the chance--in fact, they stuffed it. As someone else pointed out, federal tax revenue now is as high or higher than before the tax cuts. Spending's the problem. Perhaps President Bush will now discover that he has the power to veto spending increases.
Posted by: David W. Drake at Dec 27, 2006 3:38:19 PM
Mr. Cowen,
Your comments would have greater impact if you provided links to where Krugman warned of the "fiscal destruction of the United States".
Thank you
Posted by: Peter Schaeffer at Dec 29, 2006 3:07:37 AM
